Should Start-Ups Pay to Pitch?

A new business plan competition is kicking up a controversy: Should start-ups pay to pitch to investors? And if yes, how much is too much?

Most United States-based competitions allow entrepreneurs to apply and compete free. The Women 2.0’s Pitch Night start-up competition charges $25 to process applications. Others ask teams to pay a few hundred dollars for their own food, lodging and travel.

But a Boston-based angel investment group called Revolutionary Angels believes $4,995 is a fair fee. This October, the fund started its inaugural business plan competition with a “participation fee.” The group accepts applications free but will charge 100 qualifiers to attend its finalists’ event, where they can pitch ideas to a panel of investors and entrepreneurs and win a top prize of $250,000 in seed finance.

For the $4,995 fee, competitors get to hobnob with and soak up advice from experienced investors and chief executives enlisted by the fund for a full-day event. They can also receive a 20 percent discount on business services provided by the fund’s partners and portfolio companies.

Revolutionary Angels takes a 10 percent common stake in the winning businesses, along with the fees, but its chief executive, Chris Hurley, says he believes the event delivers value to entrepreneurs. And those who didn’t get M.B.A.’s at Harvard, Stanford or the like, where tuition costs alone reach upward of $45,000 annually, stand to benefit.

“Plenty of small-business owners don’t have access to this V.C. or that investor through an alumni network,” Mr. Hurley said. “And bootstrapping is a lot harder these days with low home values making it tough to get loans, and friends and family tapped out in the recession.”

Competition fee money will help build Revolutionary Angels’ portfolio and events, he acknowledges: “We are also a company. But nobody’s trying to get rich [on fees] here. We’re dedicated to supporting entrepreneurs, and bringing early-stage financing opportunities to otherwise overlooked great companies. It takes some overhead to achieve this.”

Jill Kickul, the director of a social entrepreneurship program at New York University’s Stern School of Business, sees the pay-to-pitch model as a free market reality but is highly skeptical of such events. “Five thousand dollars is about the cost of one business course at a top university. Can a competition deliver enough mentoring and coaching to be worth that money?” Ms. Kickul asked. “Any more than $5,000 sounds like gouging entrepreneurs, to me.”

The competition charging the highest fee is the DEMO LaunchPad, part of the DEMO tech conferences produced by the privately owned IDG Enterprise events group.

High-tech, established businesses including subsidiaries of public companies can apply free to DEMO LaunchPad. Those who are selected to “launch” — or exhibit on the conference’s main stages — pay an $18,500 fee for the coveted position. For the price, competitors get time to present to world-class investors, a specially appointed kiosk within Demo’s conference halls and an opportunity to win $1 million of free ad space and services from IDG.

In 2009, DEMO introduced a cheaper competition track, the AlphaPitch, for earlier stage start-ups (less than $500,000 in revenue). These companies are asked to pay a participation fee of $5,000 to exhibit via the DEMO AlphaPitch track. In return, they get time presenting to investors at the conference’s “general session ballroom,” and some start-up advertising and support services. DEMO brings a boon of publicity to winning teams.

Lori Lite, who is chief executive of Stress Free Kids and who competed on “Shark Tank,” the ABC reality series that is itself a business competition that doesn’t charge a fee (or pay competitors to appear on the show), agreed: “Personally, if I had $18,000 to spend I would not be spending it on a pitch scenario. I would use it to understand my customers or create new product.”

On “Shark Tank,” Ms. Lite won a $250,000 seed round from the investor and judge Barbara Corcoran, in exchange for a 50 percent stake in her company, a publisher of books that teach relaxation techniques and music for children, based in Marietta, Ga.

Pay-to-pitch competitions, Ms. Lite said, “are happening because of the financial crisis we’re in. Entrepreneurs cannot get money from banks. There are a lot more entrepreneurs than there are investors. So investors see that they can charge a fee for this. They’ll go away or their fees will come down when the market shifts.”
You can find our Business Plan Competition Guide here.

Update: A number of readers have written to me, both directly and via Twitter — I am @lorakolodny there — to ask if I am aware of the strong position opposing pay-to-pitch taken by Jason Calacanis, co-founder of the TechCrunch 50 launch conference and chief executive of Mahalo.com. While my post focused on business plan competitions, Mr. Calacanis has written more broadly about the relationship between entrepreneurs and venture capitalists. You can read his blog post about the pay-to-pitch issue here.

The value of the pitch to venture capitalists far outweighs any fee that can be charged the startup company. VC’s are in the business of searching for new ideas. The VC can pay to attend, but to charge the executive giving a pitch is suspect. The whole thing strikes me as a variation on vanity publishing. The business idea should stand on its own if it is to be legitimately considered.

This really pisses me off: Pay-to-pitch competitions, Ms. Lite said, “are happening because of the financial crisis we’re in. Entrepreneurs cannot get money from banks. There are a lot more entrepreneurs than there are investors. So investors see that they can charge a fee for this. They’ll go away or their fees will come down when the market shifts.

EVERYTHING in this country is turning into ‘one more greedy way to make money.’ I hate that entrepreneurs now have to PAY to go in front of “elite angel investors.” These investors should be thankful that they have access to some of today’s brightest minds and the people behind the next Google or Microsoft.

In my opinion, the entrepreneurs should be highly vetted (those who want to present) and the investors should see it as an honor to be in THEIR presence. These people could be these investors’ ticket to millions in revenue during this downturn.

$5k to pitch? $18k to pitch??? If they had that money, they wouldn’t be seeking investors, would they? Pay-to-play, pay-to-pitch, it’s all money-grubbing hogwash where any entrepreneur with real creativity and talent should be able to circumvent these scoundrels.

I would gladly pay to pitch my business to potential investors. Otherwise, how do you find them?

Of course, most of these kinds of investors wouldn’t be interested in my business… it’s profitable and growing. Most investment money these days still goes to people who write slick business plans about .com businesses that have no hope of every making a single dollar. (see this recent post for a prime example: //boss.blogs.nytimes.com/2009/11/18/tune-in-start-up-drop-out/)

1. If you think you have an equal probability of winning the money as the other 99 startups in the room, paying 5k for chance at 250k is almost assuredly a negative expected value transaction for the entrepreneur. If I were an investor I would probably attend this event in order to pick management teams to avoid…

2. Where does the other $250k go? the “angels” pockets?

3. The winner gets a fixed valuation at $2.5m? That doesn’t seem very financially rigorous….

3. Check out the list of people on their website. Wow, totally not worth $5,000. You could find a better set of tech entrepreneurs and investors by just going to Starbucks on University Avenue in Palo Alto – is Boston really that starved for advice? My suggestion: nix the 5k ticket, buy a $250 flight on jetblue to Silicon valley, and attend some of the myriad entrepreneur events (Stanford University is particularly fertile ground…).

I agree the merits of the start-up idea should stand on its own.
Something just does not seem right with the “Pay-to-Play pitch situation. There has to be a better use of the pitch fee money thrown away by the start-up.

I really don’t understand why there’s a debate about this. Entrepreneurs should never pay to pitch. I’m a partner at a well known venture capital firm – no one who has any credibility in my industry believes that this practice is appropriate. Here are some additional thoughts on the practice and on this Revolutionary Angels group: //www.sethlevine.com/blog/archives/2009/11/5k-to-pitch-you.php

Wow, what a scam. To recount: the 100 companies are paying $5k each (that’s $500k total paid in) for a shot at $250k in seed money. The “winner” would also surrender a 10% stake in his company.

These entrepreneurs would have better odds buying $5k in lottery tickets – lotteries return about half their sales in prizes – and the lottery wouldn’t claim 10% of the winning business. Better yet, they could hold their own lottery for the full $500k.

Suckers. The average 17 year-old online-poker player has better math skills.

This gives me an idea– a group holds a contest where the top 50 business plans are selected to present, and each one has to pay $5000 to do it. Then a group of experts picks the best one and awards them $250,000, from the entry fees, zero or minimal equity taken in return. (Increase the fees slightly as necessary to pay for the contest’s expenses.)

This is similar to those scams where you are told there is money in an account and all you have to do is pay to get it.

The real question is, what kind of people do you want to get into bed with for your business? Very crucial decision. It would be terrible judgment to get involved with people who have these kinds of ethics and short term greed. Up front you know they’re there to bleed you dry.

For me, an instant disqualification for the chance to receive the benefit of my business plan, intellectual property and creativity.

At the same time, Ms. Lite had to give up a 50% stake in her company for the “free” pitch to Ms. Corcoran. Each scenario should be evaluated on its own merits- for example, I’d rather pay $5k and have someone take a 25% stake than pay $0 and have them take a 50% stake. That pitch to Ms. Corcoran was by no means free.

A VC would most likely charge an upfront review fee because they needed the revenue. VCs that need revenue from upfront fees probably aren’t doing too well with the core VC business… helping make the companies they invest in successful thereby making very nice return from their investment.

Bottom line, only underperforming VCs would charge an upfront fee, so you are not only waisting your money, you’re dooming your venture by wasting your time and resources with a VC that hasn’t even been able to deliver sufficient return for themselves to do the normal reinvestment to find their next ventures.

The only purpose of a cost to submit ideas would be in a forum where thousands of ideas are pitched, to show who’s serious. $5000 would break most early budgets; it would be so much more valuable to use $5000 on infrastructure.

Pretty outrageous, I think. At times when I’ve been struggling to keep my small business afloat, $5k would’ve made a huge difference is being able to sustain – the last thing I’d want to do with it is throw it away to enter a contest – whatever the stakes may be. Do we really need another ‘competition’ to determine our chances of success? Don’t we have enough of that nonsense going on in our culture? I mean, spending $25 to MAYBE $100 MAX to have your plan/ideas considered might be a reasonable expense, but anything more than that feels just plain WRONG to me. Ja-Nae Duane, a gal I met at a networking event last year, has a book coming out called “How to Start Your Business With $100.” She’s the CEO at Wild Women Entrepreneurs (www.thewildwe.com), which has grown into a really large community. Anyone thinking about blowing this kind of big dough ought to check her ideas out first.

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You're the Boss offers an insider's perspective on small-business ownership. It gives business owners a place where they can compare notes, ask questions, get advice, and learn from one another's mistakes. The blog also offers analysis of policy issues, and suggests investing tips.